MONEY & INVESTING

Heed red flags about Blue Apron before buying stock

I don’t really get the whole meal kit delivery popularity sweeping across the country. If you have never heard of these services, it is where a company sends you a package full of ingredients along with a recipe to prepare the meal. You have to prep all of the ingredients and do the cooking along with paying a premium price for the food. I guess my thought is that if I am going to pay $10 for a meal, I don’t really want to spend 20 minutes dicing onions and praying that my piece of salmon is cooked medium rare.

Blue Apron is clearly the dominant player. The company went public earlier last month. With over $800 million in sales and explosive growth, the company should have been a Wall Street favorite. Instead, the company has faced significant headwinds over the last few weeks. Is this a time to jump into the stock? What may the future hold for Blue Apron?

A month before Blue Apron’s IPO, the stock was expected to make a huge splash when it went public. Then, just a few days prior to the offering, a bombshell was dropped on the food industry. Amazon announced that it was buying Whole Foods. Analysts proclaimed that the online company was going to revolutionize the way Americans buy food. One of the casualties of this announcement was Blue Apron’s valuation. Prior to the announcement, the company was expected to be priced at $15 to $17 per share. Post announcement, the company’s stock was priced at $10 to $11 and APRN went public at the bottom of that range at $10 per share.

Even at this lower valuation, investors were not clamoring for APRN. On one hand, the company was experiencing rapid growth. In the last two years, revenue grew by a factor of 10 from $78 million to $800 million. In addition, despite being the largest meal delivery company, it still has a very small market share with only about 1 percent of the $800 billion grocery market. There is lots of opportunity to grow.

However, there are many red flags with regard to APRN’s financials. First, the company is losing money. In itself, this is fairly typical with newly formed, fast-growing public companies, so is not a reason in itself not to invest in the stock. Amazon was unprofitable for years.

But the reasons for APRN’s lack of profitability are cause for some concern. The company is spending huge amounts of money to attract new customers, as existing customers are not returning. The company spends around $94 to attract each new paying customer and each of these people spends around $57 worth of food each quarter. This would be fine if customers remained loyal to the company. But just 20 percent of customers still buy from the company a year after ordering their first meal. This means that the majority of APRN’s customers are not yet profitable after deducting food, shipping, marketing and administrative costs.

Equally as concerning, the competitive landscape for Blue Apron will make it harder for the company to grow in the future. Fast-casual restaurants are promoting more healthy options and they do all of the prep work for you at basically the same price as Blue Apron. In addition, grocery stores, in an effort to combat Walmart, are offering more gourmet ready-made food products at low prices. And with Amazon entering the grocery business via Whole Foods, many analysts expect the combined company to beat Blue Apron in the meal delivery business.

All of these factors have weighed heavily on APRN. The stock now trades below its $10 offering price at around $9. Even at this level, I would be very wary of this stock until the company can show meal kits are not just a fad and they have a strategy to grow profitable customers. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for more than 15 years at several global banks.

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